Professional Documents
Culture Documents
Edited by:
Miles Hamilton
Adrian Booth
Random Walk commentary Adrian Booth
The phrase „trading range‟ is being used The FDIC‟s Quarterly Banking Profile
more often than in 2009. In 2009 the states that bank lending shrunk by 7.5% or
common phrase was „rally‟. Since October $587bn in the fourth quarter of 2009. It‟s
of last year the FTSE 100 and the S&P 500 deposit insurance fund is now at a negative
have remained unchanged and a sideways $20.9bn. GDP should take a hit as a result
pattern has formed as investors await and the FDIC may need a bailout from the
clarity on a number of issues. The first and US Treasury. Expect it to tap its line of
most prominent is the Greece debacle as credit with the Treasury by years end. The
well as the „exit strategy‟ of central banks. FDIC‟s recent numbers also show an
increase of 27% from the 3rd quarter of
Politicians and mainstream economists troubled banks. This raises the total to 702
have been cheerleading this „recovery‟ institutions. New home sales in the US
now for over a year, yet he fact remains we shrunk by 11.2% in January, or 309,000
are stuck in a long painful deleveraging units annualized. Freddie Mac is currently
process that will take years, not quarters. bleeding money with a $7.8bn loss it made
During a period of deleveraging or „on and in the 4th quarter. With trillions pumped
off‟ recession, investors realise the true into the system, we clearly aren‟t getting
value of assets such as stocks and real value for money. The economic picture
estate. Now that equity prices have soared remains dire for the US and the rest of the
majestically in the past year we believe world. With only 5% of the world‟s
that a „crash warning‟ is in order. This population, the US is borrowing 2/3 of the
warning is just that; a warning. It‟s not a worlds savings. In 2009, $5.3 trillion was
forecast. A prediction. A calculation. required to fund the World‟s economies.
We still think it‟s wise to remain cautious Over $3 trillion was for the US alone. The
in the current environment as authorities can only paper over this mess
policymakers continue to play with fire. for so long before the tide goes out. It‟s as
Equity prices could still rise. In fact the Warren Buffet said: “It‟s only when the
best performing stock market of this last tide goes out do you realise whose been
decade was Zimbabwe, when measured in swimming naked”. In the case of the US
worthless currency. Sure you would have economy, the tide is starting to turn once
made a hefty profit in Zimbabwe dollars, more. •
except your money could buy less. The
index jumped a few thousand percent. In
Editor’s comment: The masked problem.
gold terms or measured in Euros the index
essentially crashed.
My impression is that for the US, the main development
For all the stimulus measures the is that the Greek debt crisis has masked the incipient
backlog of foreclosures and mortgage losses. To me this
government undertook, the economy is
seems to reflect the fact that banks have delinquencies
still in the dumps. Real unemployment and foreclosures that need to be worked through as they
reaching 17%, when counting those forced still present a risk to their balance sheets. Ultimately, it
to work part time or have given up seems that banks have not fully realized the losses that
searching, and new home sales have failed the collapsed housing market has created.
to recover. Bank lending continues to
decline and new business loans are scarce.
The gold bug
George Soros said that Gold was in an ‘ultimate bubble’ and he has recently increased his stake in a Gold exchange
traded fund. While many believe this is contradictory, there is a strategy that I think Soros is pursuing. By Miles Hamilton
While the gold price is up 64% over the George Soros has recently doubled his
last three years, gold shares are up by only stake in the in exchange-traded fund
20% over the same period. If gold shares SPDR. I believe that this is because he has
make up some of the lost ground, investors predicted the possible correlation. From
could benefit. the beginning of 2009 to the present, Gold
and the SPDR ETF have gained nearly an
identical amount. On a return basis, they
have been moving in tandem earning 23%
in this time frame. The two securities have
developed a strong correlation since April
of last year and it seems that there will be
an inevitable dissipation. The only way
this will happen is if gold languishes or the
SPDR ETF sees returns greater than the
Gold price. •
The graph above reflects how there is a
disparity between the price of gold and the
price of gold shares. The graph shows the
Deal or no deal?
Bankers say that the biggest worry among potential
market index for gold stock in Canada
bidders at the moment is not how to finance a deal but
(white) and the price of Gold (orange).
how institutional investors will react to it given the
Thus, it is possible that there will be a
recent economic turmoil. By Folarin Araromi.
convergence in the two indexes with the
price of gold
decreasing and
stocks
increasing.
Therefore, an
investor could
short gold and
take a long
position on
gold stocks to
Given the scale and scope of the worst
profit from the convergence and
economic downturn in decades, it is of
correlation.
little surprise that the global mergers &
As the centre graph reflects, March has acquisitions (M&A) market suffered badly
been the worst month for the price of Gold in 2009. A total of 9,493 deals, worth
and Credit Suisse believes that on this US$1.76tn, came to market over the year,
a decline of more than 25% in terms of
basis we can expect Gold to drop in price.
both deal volume and value from 2008.
This is evidence to suggest that a
convergence is imminent.
Q4 2009 also accounted for 30% of the
year‟s transactions as the financing
environment, and the general economic
climate began to improve. The climate for
large-cap deal making undoubtedly
improved as the year progressed, borne out
by the fact that five of the top 10 deals of
the year were announced in November or
December. This trend has continued into
2010 with several significant deals being
announced in the first few weeks of the
year. David Brooks, head of M&A at
Global deal value is correlated to the Grant Thornton, asserts “While 2009 was
volatility of the equity capital markets about repairing balance sheets with a
(ECM), lagging on average by one quarter, strong focus on cash flow and profitability,
such that the value and number of deals 2010 will see an increase in acquisitive
has tracked the equities markets since listed firms taking advantage of relatively
1990. While growth in ECM encourages low valuations”. Proof again that even in
M&A to grow at similar rate, a difficult times firms with strong balance
consequence of falling confidence in the sheets and well defined strategies are able
ECM is that M&A activity dries up. This to do big deals.
was particularly evident in March 2009
when the FTSE 100 plummeted to 3512,
the lowest level since the eve of the Iraq
war in March 2003.
Commodities,
Goldman Sachs is ranked first in global oil M&A with
two deals worth a combined $13.5bn.
Adrian Booth
Prestige Oil – In November 2002, the
Number: 078 50122 007
Prestige oil tanker was carrying 77,000 Email: Adrian.booth17@gmail.com
tons of heavy fuel oil when one of its
twelve tanks burst during a storm off
Galicia , Spain. According to a report by This article features views and ideas that intend to give a
the Pontevedra Economist Board, the total subject account of market events. Thus, they are purely an
expression of opinion. The article is intended for the
cleanup cost $12 billion, not to mention exclusive use of students and teachers of Cass Business
School. Unauthorized reproduction or distribution of this
the 20 million gallons of oil lost at sea. material in whole or in part is strictly prohibited. Please
consult Miles Hamilton for further information.